The 12th Century theologian Alain de Lille could be forgiven a chortle on his heavenly cloud after witnessing the latest rollercoaster in gold prices.
“Do not hold everything gold that shines like gold,” he warned over 800 years ago, a warning that many traders failed to heed in the latest speculative rally.
Last Thursday the yellow metal surged up to an intraday high of $5,600 per ounce, its highest level on record, only to fall below $5,200 later the same day. On Friday, it fell below $5,000 per ounce and, as markets opened on Monday, it slumped as low as $4,400.
At the UK market close, it was trading around $4,700 per ounce, 16 per cent lower than last week’s all-time high.
Silver prices have been similarly volatile over the same period, rising as high as $121 per ounce on Thursday before plumbing below $75 on Monday morning. It ended the day at $79.50 per ounce, down about a third on Thursday’s peak.
“These are price swings that would typically be expected over the course of a year — not within a single trading day,” Nitesh Shah, Head of Commodities and Macroeconomic Research, WisdomTree said.
Gold effectively acts as a hedge against uncertainty, so it has enjoyed a long rally during Donald Trump’s second presidency. At Trump’s inauguration in January 2025, an ounce of gold fetched $2,700, but the yellow metal ended the year around $4,300.
The bull market only accelerated at the turn of the year, as investors fretted over Trump’s foreign policy ambitions and his threats to the independence of the US Federal Reserve.
Leveraged trading strategies added fuel to the fire, amplifying the upside and leaving many traders banking on further gains. This left the market exposed to a sharp correction.
The catalyst came on Friday after Trump announced Kevin Warsh as his pick for chair of the Fed. Warsh is generally regarded as an inflation hawk, and far more amenable to financial markets than some of the other names which had been mooted for the role.
His appointment strengthened the dollar and took away some of gold’s safe haven appeal.
But Neil Wilson, UK investor strategist at Saxo, said the depth of the wipeout was largely “a result of unwinding of ETF and options positions”.
“Warsh’s appointment has eased some worries about the Fed being dragooned into too many rate cuts, but the fallout was a meme-stock-like unwinding of speculative positioning and a rush to the exits,” he said.
End of the road for gold?
Due to the technical nature of the sell-off, analysts suggested that many of the fundamentals that had driven the rally remained in place.
“The strategic rationale for holding gold as a diversifier – against market volatility, geopolitical risk and policy uncertainty – remains intact,” John Wyn-Evans, head of market analysis at Rathbones said.
Analysts at Barclays agreed: “The volatility has been extreme, positioning is stretched, and short term technicals look overheated – but it seems that the broader drivers behind the move remain powerful and persistent,” they wrote in a note this morning.
These drivers include rising sovereign debt levels and Donald Trump’s continued attempts to reshape the global economy, both of which could prompt serious bouts of market instability.
Last week’s forced selling may also have “flushed out a significant portion of speculative froth”, Shah said, creating more space for long-term strategic buyers.
In the short-term, gold prices will likely remain fairly volatile, but it would be premature to call an extended sell-off just yet.
